A bitter pill for GlaxoSmithKline

Corporate corruption in China

IT READS like a plot from white-collar crime fiction. New twists in the corruption saga enveloping GlaxoSmithKline (GSK) keep adding to the British drug giant’s troubles in China. In May, following a ten-month investigation, Chinese authorities accused the company of “massive and systemic” corruption that created billions of yuan in revenue. Now the emergence of a covert sex tape adds a further layer of intrigue.

GSK’s predicament kicked off in 2012 when China’s State Administration for Industry and Commerce, a regulator, received a stream of anonymous emails alleging corruption, an investigation by the SundayTimes newspaper has revealed. In January 2013 executives at GSK, too, began getting emails from a would-be whistleblower alleging the company had paid bribes and falsified records. One such email in March included a video of Mark Reilly, then the head of GSK’s China division, having sex with his girlfriend. The video appeared to have been shot clandestinely in his apartment. Mr Reilly claimed he was the victim of a smear campaign.

In response GSK hired Peter Humphrey, a British corporate investigator and head of a Shanghai-based company, ChinaWhys. According to the SundayTimes Mr Humphrey, who was not privy to the correspondence alleging corruption, was asked to investigate the video’s origins. He was also to focus on the background of a former employee, Vivian Shi. Ms Shi, who has denied being the whistleblower at GSK, comes from an elite Shanghai family with powerful political connections.

In his initial investigation Mr Humphrey did not determine who had planted the video equipment. After filing his report GSK shared the whistleblower emails. According to the BBC, Mr Humphrey told colleagues he believed they were true. Then he was arrested. His wife, Yu Yingzeng, an American citizen and a partner at ChinaWhys was also detained. Mr Humphrey later appeared on state-run television, in handcuffs, apparently confessing to using illegal means to obtain personal information. “I am very regretful for this situation and apologise to the Chinese government”, he said, in Chinese. Mr Humphrey will likely stand trial in Shanghai early next month for illegally buying and selling private information. The trial will take place in a court closed to family and consular officials, to the concern of the couple’s 19-year-old son.

Meanwhile, a sweeping investigation by Chinese authorities concluded corruption was rife at GSK. Mr Reilly—who is not in prison but not allowed to leave China, either—presided over a web of bribery, officials at the Ministry of Public Security said. Internal GSK units with names such as “operation Great Wall” were allegedly set up to lavish cash and gifts on doctors and officials. Inflating the prices of medicines, some of which were seven times more expensive than in other markets, helped pay the bribes.

In a statement GSK said the issues relating to its China business are “very difficult and complicated”. The company added that an external audit it commissioned found some fraudulent behaviour relating to expenses, which resulted in employee dismissals. “This investigation did not find evidence to substantiate the specific allegations made in the whistleblower emails,” GSK said. The firm’s reputation, long tainted by charges of corruption in other countries, has been further damaged by its China dealings. In May Britain’s Serious Fraud Office (SFO), a government body, launched a criminal investigation into GSK’s commercial practices. Some £1.3 billion ($2.2 billion) was wiped off its market value the day after SFO’s announcement.

GSK’s denouement has rattled other foreign firms in China, including the many big drug firms that once rushed to establish a foothold in one of the world’s most promising markets. China’s health-care spending is projected to leap from $357 billion in 2011 to $1 trillion in 2020, according to a report by McKinsey, a consultancy. But China’s health-care sector is especially vulnerable to corporate malpractice. Hospitals have long relied on drug sales as a source of revenue. Doctors, who are paid too little, are wont to prescribe too many or overly expensive drugs.

Along with shady Communist Party officials, the pharmaceutical industry is a particular target of the government’s ongoing anti-graft campaign. Where corruption is endemic (which is almost everywhere) it is in China’s interest to make examples of overseas companies. As Xinhua, the state-run news agency considered a mouthpiece for the party, put it: GSK is a warning.